The central bank surprised most economists last year by lowering interest rates
Indonesia’s central bank surprised most economists in August 2018 by lowering interest rates, reflecting its relative comfort with the currency and inflation outlook.
The benchmark rate was cut by a quarter point to 4.5%, with all but six of the 28 economists surveyed by Bloomberg predicting it would stay on hold. Bank Indonesia reduced borrowing costs six times 2 years ago, making it Asia’s biggest rate cutter.
Governor Agus Martowardojo and his board had put policy easing on hold until now, concerned that tightening US monetary policy may spur outflows from emerging markets and undermine the currency. With the Federal Reserve sticking to gradual rate hikes in the face of subdued inflation, the rupiah has been relatively stable this year, gaining about 1% against the dollar.
“The central bank probably thinks the financial system is now stronger and the impact of federal fund rate hikes would be marginal or could be managed by improving fundamental conditions in the Indonesian economy,” said Josua Pardede, an economist at PT Bank Permata in Jakarta.
Bank Indonesia said the move was motivated by an improving inflation outlook and expectations of only one more US rate increase, delayed to later this year. Officials also cited the rupiah and current-account deficit remaining “manageable.”
Indonesia follows central banks in India and Vietnam in easing monetary policy in recent months as low inflation gives policy makers in Asia room to provide stimulus to their economies. Six rate cuts 2 years ago in Indonesia had failed to spur economic growth above 5%, while credit demand is still lacklustre, enabling the central bank to restart its easing cycle.
Bank Indonesia may follow through with more easing. Weiwen Ng, an economist at Australia & New Zealand Banking Group Ltd, said the bank may cut once more, while ING Group NV’s Prakash Sakpal is forecasting a 25 basis-point reduction by the end of 2017 and two more cuts in 2018.
Bloomberg Intelligence’s economist Tamara Henderson is also forecasting more reductions. Mohamed Faiz Nagutha, an economist at Merrill Lynch Asia Pacific in Hong Kong, sees no further easing.
“The rate cut from BI is a measured move, as it is coming on expectations of lower inflation, and reasonable growth,” said Rahul Bajoria, an economist at Barclays in Singapore, who had correctly predicted the decision. “We believe the central bank remains focused on maintaining financial stability, and any further easing will be done keeping that in mind.”
The rate cut may spur consumer spending and help to boost sentiment for property and automotive stocks, said Jeffrosenberg Tan, head of strategy at Sinarmas Sekuritas. The Jakarta Composite Index, the nation’s benchmark stock index, rallied 0.6% to a record at close in August 2017, taking its gain last year to almost 12%.
The rupiah retreated 0.1% to 13,359 per dollar in Jakarta. The yield on 10-year government bonds fell two basis points to 6.85%, its lowest level since July 6, 2017, according to data compiled by Bloomberg. Other key points from Bank Indonesia’s statement are inflation forecast to average about 4% this year and below 3.5% in 2018; forecast for loan growth for last year lowered to 8-10% from 10-12% previously and GDP growth is estimated to be 5.1% to 5.5% in 2018. President Joko Widodo set a growth goal of 7% when he came to office three years ago.